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The leading economist at the Bank of England has stated that long-term interest rates will probably be higher than in 2010, but they are expected to decrease below their current 15-year peak.
Hugh Pill mentioned that the Monetary Policy Committee (MPC), responsible for setting the base rate utilized by lenders to determine their interest rates, has indicated that rates should likely provide compensation for inflation and a smaller yield for shareholders. Returns must be provided.
He explained that as inflation approaches 2% – the target established by the government for the MPC – the rate-setters will seek a new normal.
Mr. Pill stated that where interest rates will eventually settle is somewhat of a “philosophical question”.
He expressed his hope that the bank can operate in a less turbulent environment in the future – referencing the economic impact of the pandemic and the conflict in Ukraine – which could enable it to establish rates in a more stable context.
“Our perspective is that the level of interest rates, the level of the bank rate, can be seen in relation to inflation: so it must include compensation for someone who has a bank rate. Depositors… They likely desire compensation for inflation,” he explained.
“We are targeting a 2% inflation rate. Therefore, an interest rate of 2% is needed to account for it. And, you know, people deposit money in the bank to save. They anticipate some returns on that.”
He added, “So, it may be necessary to add a small amount to the 2% inflation compensation in the form of actual returns, let’s say half a percentage point, one percentage point.”
According to Mr. Pill, this leaves individuals with a “general number”.
This is “a number that is lower than our current interest rates, but potentially higher than what our interest rates were in the pre-COVID era”.
“That’s because prior to COVID, we were still addressing the consequences of the financial crisis, and we had to support the economy rather than impose restrictions.”
According to Mr. Pill, “The circumstances that led to pre-COVID zero rates were exceptional.”
Last week, the MPC maintained interest rates at 5.25%, marking the second consecutive time it has kept the base rate unchanged after a nearly two-year period of continuous increases.
Source: uk.finance.yahoo.com
